More than a year after CEO change, EBS plays catch-up in FX

Once the largest currency venue for major global banks, EBShas seen volumes drop sharply in recent years as major WallStreet banks have increasingly handled trading in-house.

The company's volumes are down sharply, with a 27 percentyear-over-year decline as of September, and are less thanone-third of a peak hit in 2008.

To head off more declines, EBS is betting it can attractmid-sized banks they see as underserved in this market.

The company's new direct dealing platform, called EBSDirect, is primarily aimed at smaller and regional banks,although it has signed up other non-financial clients as well.

"The direct dealing segment of the industry is growing in afragmented fashion and there is no dominant player," GilMandelzis, chief executive officer at EBS, told Thomson Reuters.

"There's an opportunity here for EBS to become one of thebiggest players, if not the biggest in the market."

These smaller and regional banks represent a sizable chunkof the forex market - about 24 percent, or about $1.3 trillionof the $5.3 trillion global trading volume per day, according tothe 2013 estimates from the Bank for International Settlements.

EBS announced EBS Direct in November last year and launcheda pilot program in April. It's a separate FX venue focused onproviding direct, fully disclosed prices to so-called Tier-2 andTier-3 banks. The latest version will go live before year-endand will run alongside the main EBS platform.

Direct dealing, however, is nothing new. ThomsonReuters-owned FXall, aimed at the asset management community,and Frankfurt-based 360T, geared toward corporations, offersimilar services and have been around for about 10 years.

The initiative was planned for a number of years at EBS,according to an industry source familiar with the company, butwas derailed because of management changes last year, whenMandelzis took over as CEO. That shake-up came after clientsbalked at EBS's decision to start quoting many currency pairsout to five decimal places, which bank clients said favoredcomputerized traders and disrupted trading for others.

The company is owned by London-based interdealer broker ICAP and competes with Thomson Reuters in the FXdealing business.

SHRINKING INTERBANK MARKET

Interbank venues have struggled to respond to the changingstructure of the forex market, with major banks handling clientrisk themselves instead of hedging through trading platforms.BIS data shows that interbank transactions accounted for just 39percent of total global forex trading as of April 2013, downfrom nearly 60 percent in 2001.

EBS and other anonymous exchanges, where buyers and sellers are not disclosed, were losing ground among regional banks,which were migrating to both new and existing direct dealingplatforms that reveal the identity of buyers and sellers. But"now that we have EBS Direct, many of these clients aremigrating back to EBS," Mandelzis said.

EBS' average daily trading volume rose slightly in Septemberthis year to $81.2 billion, after falling to $78.7 billion inAugust, the lowest since ICAP bought the firm in 2006. InSeptember 2008, EBS' volume hit a high of $274 billion.

Integral runs FX Grid, a global trading network connectingactive traders with major sources of FX liquidity. It alsodevelops the technology for other FX execution platforms and hasbeen in the direct dealing business the last eight years.

Sandhu said matching engines like EBS are attempting tobuild niche products to meet the needs of a particular segment."It's like saying: 'I'll come up with a better mousetrap thanthe other for just that part of the market,'" he said.

But Mandelzis said the company does not have todifferentiate to gain significant share in the market.

"The reality is that over 300 clients have signed up for EBSDirect before we had the product, which already makes us one ofthe largest players in the market."

EBS should have an additional 200 clients by next year, andhas signed up more than 30 liquidity providers, Mandelzis said.

Thomson Reuters, which also runs an interbank system, hasalso seen volumes decline over the years, but not as much asEBS, as it specializes in more currencies. It hit highs ofnearly $180 billion in 2011, declining to an average of $110billion per day last month. It became the largest FX platform bythe end of 2012 after its acquisition of FXall.

Financial services consulting firm Aite Group, in itsSeptember 2013 report on the FX market, said EBS is stillconsidered the premier venue for spot trading, but noted thatthe firm's underlying technology in terms of the speed inexecuting a trade "is considered slow by today's standards."

Mandelzis doesn't deny that there are much faster executionvenues in the market than EBS.

"We do not aspire to be the fastest. We are in the businessof providing the most reliable market and solutions for genuineliquidity," Mandelzis said. "If traders are looking to move fromthe millisecond world to the microsecond world, then EBS is notnecessarily the best place for them."